Background

It is now widely understood that diverse groups make better decisions because they are less likely to suffer from the ‘group-think’ which can lead to sub-optimal decision making. More recent research goes further and suggests a causal link between greater diversity and stronger financial performance where diversity is achieved at a sufficient level and is normatively accepted.1

Diversity is a lead indicator of wider corporate culture. We are all aware of companies failing because the board is populated with directors unwilling, or unable, to challenge a single domineering personality. As investors, we may not know what goes on behind closed doors, but we still need to be able to evaluate corporate culture. Often, we glean insights into the effectiveness of a company’s decision-making processes and the health of its corporate culture from a combination of scrutinizing published information and, critically, via engagement meetings.

Our Objectives

Female participation in the global workforce is unequal, and a key area of inequality is in senior corporate positions. According to MSCI, 22.6% of directors across companies in the ACWI (All Country World Index) were female in 2021, but 14.2% of companies still had an all-male board.2 We do not have a full data set available to us at the management level, but we would expect similar findings. While we acknowledge there are cultural reasons which have historically prevented women from reaching senior positions in business, we do not believe this level is acceptable in 2022.

This is also the case for ethnic-minority participation, again particularly within senior levels of organizations. In 2020, the 30% Club, a campaign group which seeks to increase diversity at board and senior-management levels, expanded its targets from focusing solely on gender to also encouraging all FTSE 350 boards and executive committees to include one person of color by 2023.3 Similar to studies on gender and corporate performance, there is evidence to suggest that ethnic diversity in executive teams is correlated to improved profitability.

Our first-hand experience of performing company research has also found that company disclosure on diversity is poor. This includes basic workforce composition data, and diversity and inclusion policies. Not only does this make it hard for us as investors to assess a company’s culture, but it also makes it difficult for prospective employees to do the same. Employees are attaching increasing weight to a company’s diversity and inclusion performance, and not only will companies which perform poorly fail to attract the best candidates available, but those companies which do not disclose their efforts will also suffer.

We see this not just as a company-specific issue, but also as a systemic one. For example, research by the World Economic Forum found that increasing female participation in the workforce could increase GDP by US$12 trillion by 2025.4 In fact, this is seen as such an important global objective that the UN has dedicated one of its Sustainable Development Goals solely to gender equality.

Therefore, our approach to stewardship focuses on two objectives where we believe the most shareholder value lies, and where we can have the most influence as investors:

  1. Encourage companies to increase the participation of women and diverse candidates at senior levels by growing and encouraging a diverse talent pipeline.
  2. Advocate for improved diversity and inclusion-related disclosures and strategies:
    (i) Where a company has a diversity strategy but disclosure is limited
    (ii) Where a company has not developed a rigorous diversity strategy.

Our Voting and Engagement Policy

Our policy intends to address the two objectives listed above.

As part of the research conducted ahead of a company’s AGM to inform our voting decisions, we will look at two key indicators:

  1. A company’s publicly disclosed diversity and inclusion policies
    We expect a company to provide basic public disclosure on its diversity and inclusion policies and practices, not just in relation to gender but encompassing a wider understanding of diversity and inclusion. We expect to find this on the company’s corporate website, its careers page and in its annual report (or corporate social responsibility report).

  2. The gender split of a company’s board, and any other workforce data disclosed
    When examining workforce data, we believe it is appropriate to split our policy geographically to account for regional differences.

At board level, in countries where we believe gender diversity can be reasonably expected, we expect to find at least 30% of board seats being held by women. In countries where gender diversity is less well established, we expect to see progress towards the 30% level and to see diversity in its widest context as a consideration in the board member nomination process.

We firmly emphasize 30% does not represent a mandatory quota, and we will judge each company on a case-by-case basis, in the context of its geography and industry, as well as any other workforce data it discloses. This will include data at various levels of seniority, beyond just board-level disclosures, and diversity data beyond gender, such as age, ethnicity, or education.

Voting Action Scenarios

  1. In countries where diversity is better established
    If a company meets neither our board gender diversity criteria nor our disclosure requirements, we will vote against the chair of the nomination committee and engage with the company. If a company fails one of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee where we have seen insufficient progress.
  2. In countries where diversity is less well established
    If a company fails any or both of our criteria, we will engage to explain our policy and vote against the chair of the nomination committee in future years if we see insufficient progress.

Engagement in Practice

Recent examples of our voting and engagement activity related to diversity include:

  • Content distribution platform (AGM, January 2022): We voted against the chair of the nomination committee owing to a lack of gender diversity on the board.
  • Multinational beverage company (AGM, March 2022): We voted against the re-election of the board chair owing to a lack of gender diversity on the board.
  • Drug store and dispensing business operator (Engagement, May 2021): The company is working on improving its culture to enable women to take managerial roles, in order to meet its diversity target of 30% female managers by 2029, up from 15%. It notes childcare as a key issue and has implemented various measures to protect evenings and weekends for employees. The company also discussed the challenges it faces in relation to diversity, a key one being that in many regions, significant numbers of employees cannot work during evenings or weekends, leaving the burden with a few employees. It has tried to address this by increasing its hiring of graduates, but has faced pushback from shareholders as this has increased labor costs versus net sales. The company believes both ESG (environmental, social and governance) and financial performance are important, so intends to use technology to improve profitability.
  • Professional services company (Engagement, July 2021): The company shared its targets in relation to diversity and inclusion, which it believes is an essential element of its value proposition. These targets focus on a gender-balanced workforce by 2025 and on increasing representation from people belonging to different races and ethnicities, as well as people with disabilities.
  • Food manufacturer (Engagement, October 2021): The company shared that there has been a lot of focus at board level in relation to board gender diversity. We emphasized the importance of harnessing the benefits that greater diversity brings and explained that we would like to see the company evaluate board-level diversity during the succession planning process. We also learned that the company’s operating divisions are being held accountable for hiring and promoting to key roles, following the appointment of a new human resources director.
  • Consumer electronics manufacturer (Engagement, March 2022): The board is trying to improve diversity, particularly among the independent directors. In terms of gender diversity, it has more than one female director and aims to increase the proportion further. It is also seeking to increase the proportion of foreign independent directors. We were pleased to see the board is focusing on attaining complementary experience, such as environmental and information technology expertise. We consider that these additions can contribute to effective decision-making.

1 Gary Low CFA, Diversity and Alpha: Reviewing Academic Research on Correlation and Causation, September 2020.
Princeton University Press, The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy, Scott E. Page, September 2017.
McKinsey, Delivering through diversity, 18 January 2018.
IFC, Women in Business Leadership Boost ESG Performance, 2018.
2 MSCI, Women on Boards 2021 progress report, Christina Milhomem, November 2021.
3 30% Club: Ten years on: 30% club UK sets new targets, July 2020.
4 McKinsey, How advancing women’s equality can add $12 trillion to global growth, September 2015.
World Economic Forum, The $12 trillion incentive for closing the gender gap, June 2016.

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